Tax deductions on partnership return for out-of-state investors

8 Replies

Hi Everyone!

My wife and I live in NJ but own rentals in Indiana managed under IN LLC and its parent WY LLC. We are members of WY LLC with 50-50 ownership. My CPA says 'since both rentals are in another state, it is difficult to claim that you are both actively participating in the rental activities meeting the hours test.' and suggests to claim only half of tax deductions.

Is this how other out-of-state investors do their returns?

I don't want to be too aggressive but I'd like to understand what's reasonable and what's aggressive by understanding how other people does their returns.

Look forward to hear your experiences!!

Originally posted by @Marvin Song :

Hi Everyone!

My wife and I live in NJ but own rentals in Indiana managed under IN LLC and its parent WY LLC. We are members of WY LLC with 50-50 ownership. My CPA says 'since both rentals are in another state, it is difficult to claim that you are both actively participating in the rental activities meeting the hours test.' and suggests to claim only half of tax deductions.

Is this how other out-of-state investors do their returns?

I don't want to be too aggressive but I'd like to understand what's reasonable and what's aggressive by understanding how other people does their returns.

Look forward to hear your experiences!!

 Claim your legitimate expenses. And be able to prove what you are incurring. Actively participating is a whole separate issue.  What are the expenses he is struggling with?

Medium hta logoSteven Hamilton II EA, Hamilton Tax and Accounting | [email protected] | (224) 381‑2660 | http://www.HamiltonTax.Net

I am claiming expenses such as cleaning, legal and professional service fees, insurance, taxes, interest, repairs and few others and I believe they are legitimate expenses. However, I see my CPA split tax deductions (incl. expenses) in half and claims only that portion for myself since he considers myself as an actively participating and my wife as passive. My questions are:

1) How do other investors with LLC claim tax deductions for husband and wife on partnership and personal returns?

2) How does Actively Participating impact tax deduction portion of the return? Does this normally refer to 'material participation test' or 'real estate professional qualification'?

Originally posted by @Marvin Song :

I am claiming expenses such as cleaning, legal and professional service fees, insurance, taxes, interest, repairs and few others and I believe they are legitimate expenses. However, I see my CPA split tax deductions (incl. expenses) in half and claims only that portion for myself since he considers myself as an actively participating and my wife as passive. My questions are:

1) How do other investors with LLC claim tax deductions for husband and wife on partnership and personal returns?

2) How does Actively Participating impact tax deduction portion of the return? Does this normally refer to 'material participation test' or 'real estate professional qualification'?

 Hey Marvin did you ever figure it out since you're an active investor?  Could you write off travel expenses / meals as well when you're visiting the property?

@steven hamilton (how can I add @stevenhamilton?)

Originally posted by @Marvin Song :

I am claiming expenses such as cleaning, legal and professional service fees, insurance, taxes, interest, repairs and few others and I believe they are legitimate expenses. However, I see my CPA split tax deductions (incl. expenses) in half and claims only that portion for myself since he considers myself as an actively participating and my wife as passive. My questions are:

1) How do other investors with LLC claim tax deductions for husband and wife on partnership and personal returns?

2) How does Actively Participating impact tax deduction portion of the return? Does this normally refer to 'material participation test' or 'real estate professional qualification'?

 Get a new CPA. Your CPA is either doing it wrong, or not able to explain his actions in a way you can understand. Both are bad indications, especially for the real estate investor.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

I'm with @Brandon Hall on this one.  I read the original post and my first reaction was "What the actual heck is happening here?"  I read it several times and there was no way I could spin it that it made sense in the slightest.  Take your tax return to a real estate savvy CPA and ask them to either explain in better detail why the original CPA did it correctly or have that CPA amend your return (which is likely to be the case, based on what I'm reading).  

While I agree that you are not likely a real estate professional, that doesn't mean that you aren't actively participating in the rental management.  These things are not mutually exclusive and it sound like your CPA Is VERY confused on this topic.  And only taking half of the deduction for stuff that is probably paid to third parties such as cleaning - that doesn't matter, even if you've got one person actively participating and one not.  But both of you can actively participate.

I'm actually curious enough about this that I would like to offer to have you either send your return to me or upload it to dropbox or something (stripping identifying information, of course).  I'll take a look at it and give you some advice from there if you want.  Contact me via PM if this is something you want to do.

Medium cluebussol logo3inLinda Weygant CPA, Clue Business Services, Inc. | [email protected] | Podcast Guest on Show #244

@Will F. No, I couldn't figure it out.

My challenge is to find someone who have expertise in both foreign investments AND real estate and I couldn't find someone who would be a good fit for me yet hence I'm just working with my current CPA although I'm not completely happy.

@Linda Weygant Thanks for the offer. Do you have any experience with foreign investments that are held in Anguilla lBC?